The majority of fund managers fail to beat the market, but some consistently do. Bill Miller is among them, and he shares with us his top 4 stock picks for the coming year.
It’s not anywhere as easy to beat the market with a fund as people imagine, as stocks tend to move together and the difference between them isn’t always so significant. People beat markets by using timing primarily, in during the good times, out during the lean ones, and they may even put their money on the sell side of markets when things turn bearish if they are really out to boost their potential returns.
What makes beating markets so challenging for mutual funds is that they do not have this ability, and must stand fast regardless of market conditions. This limits them to just the ability to switch horses, and this is challenging given that it also costs money to do this switching. We can easily get this wrong as well by not paying enough attention to the right things, in this case the actual performance of stocks instead of just the way we think they should perform.
Bill Miller made a legend of himself back when he was working for Legg Mason, as in spite of these constraints, he managed to beat the market 15 years in a row. The financial crisis of 2007 ended up being his undoing with this fund, as it was with so many fund managers, and a high exposure to financials at the time saw his fund get hammered.
Miller manages his own fund with his son these days, and continues to impress. He’s back to beating the market again, averaging 3% over market returns for the last 10 years. Among stock pickers, there are few fund managers out there with such a proven record, and therefore when Miller speaks, and when he provides us with his top stock picks, people do tend to listen.
Miller’s Top Stocks for 2019
Miller’s top 4 stocks for 2019 are Facebook, Amazon, Avon, and ADT. We’ll have a closer look at these stocks to get an idea of how bullish these picks actually appear to be based upon their trading outlooks.
While we really can’t even have an intelligent discussion about where a stock is headed in the next year without accounting for market forces, as stock prices overall are more driven by these forces than anything else, to be fair, we do need to set this aside a bit because Miller isn’t deciding such things, he’s really choosing among competing long positions in the market, where a good pick may actually go down but still be good because another may go down more.
Analysts rely on fundamental analysis to decide such things, which may include a fundamental analysis of the overall market as well, but with stock picking we’re not even that concerned about this, because again, the task is about being long A or B and seeing which one is more likely to outperform the other.
As investors though, all of this does need to matter to us, as we are free of the limitations that mutual funds are under, and we don’t even have to pick stocks at all, and can just go with market trends instead and invest in the market as a whole. That’s basically what mutual fund investors do, but they have the means to be out of mutual funds anytime they wish, even though they usually do not choose this.
Looking at business conditions can be quite helpful in making the everyday decisions that fund managers need to make, but we can also just look at the charts and see how this is all playing out, which means not caring so much about our opinion of the stock’s fundamentals and instead looking at what the market’s opinion is and how this opinion is trending.
Letting the Charts Speak
Facebook had been trending up over the last few years quite nicely indeed, and reached a peak of $211.50 last July. It then fell upon harder times and dropped all the way to $123.42 in December. It’s come back over $20 a share since, and does seem poised to trade even higher.
Investors have therefore seen their confidence rise in this stock overall over the past month, and this recent comeback adds up to a 16% move, outperforming the market during this time.
Amazon’s recent story has been pretty similar, and Amazon is a perfect example of how much certain stocks move compared to the market. From September 2017 to September 2018, this stock more than doubled in value, going from about $1000 to about $2000. Over the next 3 months, during the recent correction, it gave back over $600 a share, where most of the gains of the previous year did get corrected so to speak.
Amazon has come back nicely since then though and is also pointed in the right direction, exceeding the market rise once again.
ADT is an interesting choice, as this is not a stock that has fared well over the last while, and it is down 45% from its initial price a year ago. Its potential to move up a fair bit may be limited compared to Amazon and Facebook, especially since this looks more like an IPO that has relatively settled in a year into its life.
ADT may be a safer pick though than the first two though, which does count for something, especially if you are holding it and probably not planning on selling as is the case with Miller.
The most interesting choice here though is Avon, which we would probably want to call a distressed stock, although it’s been distressed for quite a while now. Once trading as high as $46 a share back in 2004, these days it trades below $2. Perhaps even more notably, during the bull market of 2009-2019, it has lost 90% of its value while the market has nearly tripled in value, which not a good sign at all.
If a 10-year bull market and 15 years of trying to improve their business could not stop this stock from such a freefall, we may wonder what would. Avon has shown more promise lately as a company but we will need enough of a change here.
Perhaps things are turning around for Avon, and this appears to be the case to some degree at least. it is up off its 2018 low by about 30%, which does look very nice indeed, but must be taken with a grain of salt given this stock’s history. Their last earnings report was favorable though, and they will release another next month, so we’ll have to see how that comes out.
The two superstar stocks, Amazon and Facebook, do look like they have some real room to move if conditions remain favorable, with ADT looking at least reasonably good, and Avon being more of a flyer that if things improve could really deliver some good results in the market in 2019 if things go well, but they will need to.